Question
Arroy Snackfoods is considering replacing a five-year old machine that originally cost $75,000. It was being depreciated using straight-line to an expected salvage value of
Arroy Snackfoods is considering replacing a five-year old machine that originally cost $75,000. It was being depreciated using straight-line to an expected salvage value of zero over its original 10-year life and could now be sold for $40,000. The replacement machine would cost $215,000 and have a five-year expected life. It would be depreciated using the straight-line method. The expected salvage value of this machine after 5 years is $30,000. The new machine is expected to operate much more efficiently, saving $6,000 per year in energy costs. In addition, it will eliminate one salaried position saving another $68,000 annually. The firm's marginal tax rate is 25% and the WACC is 9.5%.
Required:
- Set up an operating cash flow statement, and calculate the payback, discounted payback, NPV, IRR, and MIRR of the replacement project. Should the project be accepted?
- At what discount rate would you be indifferent between keeping the existing equipment and purchasing the new equipment? Use Microsoft Excel and explain it.
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